Sri Lankans have been burdened once more with heavy taxation with the Value-Added Tax (VAT) component increasing from 15% to 18% from 1 January 2024. The list of VAT-able goods and services indicates that VAT increased by 3% for certain categories, while new additions to the schedule reflected a jump from 0% to 18%.
Responding to a question by The Sunday Morning on whether a consumer could refuse to pay the increased VAT component, State Minister of Finance Ranjith Siyambalapitiya said: “Consumers have the right to ask establishments that charge the VAT component for goods or services supplied to show their VAT registration certificate. Ideally, the VAT registration number should be visible on the receipts or invoices issued, so the consumer can cross-check the number and verify its authenticity through the Inland Revenue Department (IRD).”
Siyambalapitiya added that all establishments that were registered for VAT and provided goods and services that were applicable for VAT should display their VAT certificate at the business premises.
At present, a business or industry with a turnover of over Rs. 80 million per annum is required to register for VAT. However, Siyambalapitiya stated that necessary legislative arrangements were under consideration to bring the annual turnover threshold down to Rs. 60 million this year.
What is VAT?
According to the Inland Revenue Department, the Value-Added Tax Act replaced the former Goods and Services Tax (GST), which was an applicable tax for the consumption of scheduled goods and services gazetted by the Government of Sri Lanka.
The VAT Act came into force on 1 August 2002 through Act No.14 of 2002. As of 15 December 2023, the VAT Act has undergone 21 amendments, with the latest amendment published as a Supplement to Part II of the Gazette of the Democratic Socialist Republic of Sri Lanka of 15 December 2023, Value-Added Tax (Amendment) Act No.32 of 2023.
The IRD further states that the tax is applicable for goods and services consumed domestically, with a multi-stage tax levied on the incremental value at every stage in the production and distribution chain of goods and services. The goods imported into Sri Lanka and goods and services supplied within the territorial limits of Sri Lanka are subject to this tax.
The tax is borne by the final or ultimate consumer of goods or services. It is an indirect tax and the Government will receive, at the end, an amount equal to the amount paid by the final consumer through the intermediary suppliers in the chain of production and distribution.
Only a 1.8% revenue increase
The latest amendment that came into effect on 1 January 2024 saw 97 previously VAT-exempt goods and services – including fuel, gas, and telecommunication services, as well as several food products manufactured using locally-cultivated grains, locally-manufactured coconut milk, and certain dairy products (locally produced) – being included in the schedule.
Items such as medicines, educational services, public passenger transport services, and food products such as infant milk powder, locally-manufactured rice, bread, etc. are exempt from VAT.
In December 2023, State Revenue Unit Director K.K.I. Eranda revealed that the Government expected revenue of Rs. 1,400 billion in 2024 via VAT. The Government estimates there are approximately 13,000 businesses enlisted for VAT collection and that this figure will increase to 50,000 in the future.
According to Eranda, the broadening of categories in 2024 will curtail the exemptions given in the past, which led to leakage of taxes. It has been proposed to reduce the VAT registration threshold from Rs. 80 million for 12 months and Rs. 20 million per taxable period to Rs. 60 million for 12 months and Rs. 15 million per taxable period this year.
While in many countries VAT revenues are 6-8% of GDP, according to the Central Bank of Sri Lanka (CBSL), in 2023, estimated VAT revenue was only 2.2% of Sri Lanka’s GDP. With the increase in VAT for 2024, CBSL Deputy Director of Economic Research Janaka Edirisinghe opined that the Government could increase VAT revenue up to 4% of its GDP. This is still below the optimal level and will only see a 1.3% increase in VAT revenue to the Government.
Excessive burden on vulnerable groups
Institute of Policy Studies (IPS) Research Officer Lakshila Wanigasinghe, in an article titled ‘New year, new VAT: Can Sri Lanka’s poor cope with the increase?’ observed: “The tax rate increase and the threshold reduction for businesses liable for VAT signals that more items are applicable for VAT at a higher percentage than before. Although this affects all households, it adds an excessive burden on the already-struggling poor and vulnerable groups grappling with the concurrent crises from Covid-19 in 2020 to the ongoing economic crisis.”
Wanigasinghe further noted that the fuel price hike that directly impacted VAT application would trigger a domino effect that would burden consumers as household expenditure would potentially inflate in the coming weeks.
The VAT reforms are likely to add to inflationary pressures in 2024. This, in turn, will further reduce the purchasing power of already-constrained households. The country witnessed a relative increase in inflation from October 2023 onwards, as reflected through the Colombo Consumer Price Index (CCPI) where inflation from September 2023 through December 2023 showed a climb of 1.3%, 1.5%, 3.4%, and 4% respectively.
Consumers are still reeling from the impacts of the economic crisis of 2022. A survey conducted by the Department of Census and Statistics (DCS) in 2023 indicated that 60% of households in Sri Lanka had experienced a decrease in income since March 2022, while 90% of households had reported an increase in monthly household expenditure.
“The combination of reduced income and rising expenses is poised to constrain consumer spending, particularly affecting goods and services subject to VAT. For example, the survey results reveal that 83% of households whose expenditure increased due to the economic crisis experienced a rise in transport costs,” Wanigasinghe noted.
Following the imposition of VAT on petrol and diesel (previously exempt from VAT), the price hike in these commodities will further escalate household expenditure on transport, compelling some households to self-impose restrictions on the use of certain modes of transport or find alternate solutions.
Increase in consumer complaints
Last week, The Sunday Morning, in an article titled ‘VAT increase: Complaints mount on application issues,’ highlighted that certain businesses and retailers who were not registered for VAT continued to charge VAT on the goods and services purchased.
Commenting on this, Finance Ministry Department of Fiscal Policy Tax Advisor Thanuja Perera noted: “Shops that can charge VAT must display the licence obtained from the IRD. Invoices, as per the format set by the IRD Commissioner General, must be issued to customers after adding VAT. The Government strictly enforces penalties against businesses that collect money without proper VAT registration, pursuing both penalties and collected VAT funds.”
Meanwhile, the Ministry of Finance is considering issuing VAT registration numbers to individuals who pay taxes.
Verifying the authenticity of a VAT registration certificate
As confirmed by the Ministry of Finance as well as the Inland Revenue Department (IRD), consumers can now check the authenticity of the VAT registration of a business via the e-services portal through the IRD website.
Consumers can input the following details that are available on the VAT registration certificate displayed at the establishment or on the tax invoice/receipt issued at the time of purchasing goods or services:
- Taxpayer Identification Number (TIN)
- Documentation Identification Number (DIN)
- Certificate name – select the type of the tax certificate from VAT Certificate
- Clearance Non-VAT Certificate or Temporary VAT Certificate.
Following this, consumers can then enter the CAPTCHA displayed in the box to validate the query and press search.
Taking to social media recently, a consumer had posted a bill from a restaurant that reflected the VAT component and attempted to charge the consumer VAT on the total bill.
With the establishment failing to print the VAT registration number on the bill and not displaying the tax registration certificate at the premises, the consumer had refused to pay the VAT component of the bill.